Corporate governance is defined as the system of rules, practices and processes by which the firm is directed and controlled. It balances the interests of many company stakeholders, such as shareholders, senior managers, customers, suppliers, financiers, government and society (Chen, 2023). The firm will gain a competitive advantage if compatible with the managers' decisions and the shareholders' interests (Khadafi, 2014).

Corporate governance mainly consists of mechanisms that cover competitive markets of goods, capital and labour (including managers) and non-market mechanisms that rely heavily on performance-based management incentives and external corporate governance (Khadafi, 2014). The board of directors, the primary direct stakeholder influencing corporate governance, should ensure that the company's corporate governance policies include corporate strategy, risk management, accountability, transparency and ethical business practices (Chen, 2023). These basic principles guide many issues, such as compensation, treatment of employees, reporting unfair practices, coping with climate impacts. Corporate management should take ethical decisions for the benefit of all its stakeholders with honest and transparent company behaviour. Good corporate governance makes companies attractive to potential investors, while bad corporate governance leads to scandals and bankruptcy due to a company's collapse (Chen, 2023).

References

Chen, J. (2023, March 7).Corporate governance definition: How it works, principles, and examples. Investopedia. https://www.investopedia.com/terms/c/corporategovernance.asp#:~:text=Good%20corporate%20governance%20creates%20transparent,the%20community%2C%20and%20public%20officials.

Khadafi, M. M. M. (2014, May 5).#10 Corporate governance. LinkedIn. https://www.linkedin.com/pulse/10-corporate-governance-muamar-khadafi/ This is a discussion forum and I need answer for it with reference.